Cabot Explorer Issue: January 30, 2025

Portfolio Changes: Alphabet (GOOG) – Move from Buy a Half to Sell

DeepSeek: “Sputnik” Moment or Just “Cheap AI”?

“More investment does not necessarily lead to more innovation.”

“When doing something, experienced people will tell you without hesitation that you should do it this way, but inexperienced people will have to repeatedly explore and think seriously about how to do it, and then find a solution that suits the current actual situation.”

-Liang Wenfeng, founder of the company that created DeepSeek

Given market turbulence and the importance of the DeepSeek market earthquake, I think it makes sense to focus sharply on the development’s implications.

This is not just about Nvidia (NVDA) but about the AI story overall and its tentacles reach down even to energy and our very successful Centrus (LEU) recommendation.

Nobody is sure, of course, whether this is a market overreaction or a market- and rivalry-changing event such as the Soviet Union’s Sputnik event which shook the confidence of America in 1957.

Let’s begin with the history of the Chinese AI developer DeepSeek.

DeepSeek was founded in 2023 by Liang Wenfeng, the chief of a quant hedge fund called High-Flyer. Born in Guangdong, China in 1985, Liang founded DeepSeek with only 10 million yuan ($1.4 million) of capital, according to company database Tianyancha.

High-Flyer develops AI models that are open source. This means that the wider developer community at large can both examine and improve the software. So, in contrast to basic OpenAI which is available only to paying ChatGPT subscribers of the Plus tier at $20 per month or the Pro at $200 per month, DeepSeek R1 is a free model. This strategy aims to recruit the largest number of users as quickly as possible before leveraging its large audience to make money.

DeepSeek’s low-cost R1 model is designed to mimic human reasoning. For example, according to the Wall Street Journal, an economist asked R1 how much 25% tariffs would affect Canada’s GDP, and it came back with a sophisticated answer in 12 seconds. Oh, and with the specific steps R1 used to get to that answer.

This all explains how the mobile app rocketed to the top of the iPhone download charts in the U.S. after its release in early January. It represents “one of the most amazing and impressive breakthroughs,” according to legendary tech investor Marc Andreessen.

DeepSeek’s claim is that its new R1 model was built for one-thirtieth the cost of OpenAI’s flagship product. This is unlikely, and it is more probable that it benefitted from substantial government support, though it is unclear at this point.

Nevertheless, DeepSeek is proving that rapid advances are possible even with fewer and less-sophisticated chips.

This has significant impact on the high-flying company Nvidia. The company controls 90% of the market for specialized chips used to build AI networks.

In the two years since OpenAI released ChatGPT in late 2022, Nvidia’s revenue has jumped more than 200% and its stock had surged more than 10-fold since early 2023, reaching a $3.3 trillion market valuation until this week. Related stocks were impacted this week in sectors from chip software developers to advanced chipmakers such as Taiwan Semiconductor Manufacturing (TSM).

DeepSeek’s announcement also highlights a Chinese advantage I have highlighted several times, which is its deep well of data – a key element in many areas of high-tech development. Computing power, a talent pool, and scale complete the formula for success. You can see this on display following an overlooked additional DeepSeek v3 model, which surprised AI experts by providing performance comparable to advanced public models from OpenAI and Anthropic.

Another question is how Washington and the Trump administration will respond. President Trump recently threw his weight behind a $500 billion private sector investment in the Stargate AI initiative. Will Washington try to protect Nvidia chips like the leading H20 chip by implementing a ban on the export of the H20 to China?

Ironically, U.S. export controls on advanced semiconductors were aimed at impeding China’s AI development, but they seem to have supercharged innovation. DeepSeek also found a loophole in the export controls.

My takeaway is big AI developers will have a lot more competition than they banked on, meaning lower profit margins. Smaller AI developers and smaller companies trying to leverage AI models will be the big winners. What we do with AI is what is really important.

Which brings me to a new Explorer recommendation.

New Recommendation

Recursion Pharmaceuticals (RXRX)

It currently takes about a decade and an average of more than $2 billion to get a new drug from inception to FDA approval. However, artificial intelligence could dramatically cut the cost and accelerate the timeline. Rather than requiring tens of thousands of participants, as many trials do today, AI allows a more focused approach, helping create safe new therapies and get them into medical practice faster.

In my view, AI is creating the most radical and positive transformation in health since the introduction of antibiotics.

Recursion (RXRX) is using artificial intelligence (AI) software to increase the tempo of drug development.

The stock jumped in 2023 when Nvidia disclosed a small equity stake. However, Recursion stock has fallen around 55% from its previous peak because investors are still waiting for clinical validation of its AI-powered drug discovery platform.

Recursion Pharmaceuticals was founded in 2013 and received its first green light to begin a clinical trial with REC-994, an experimental drug it discovered with help from its AI-driven discovery platform in 2018.

Unfortunately, REC-994 for cerebral cavernous malformation failed to improve outcomes for patients with the rare neurovascular condition in a phase 1 study and another also failed to meet expectations.

The journey continues, and any progress on clinical validation of its platform could send the stock soaring. A phase 2 trial with REC-2282 and neurofibromatosis patients is in the works right now, and any success fueled by cheaper AI going forward would ignite this stock.

This is clearly an aggressive stock so don’t get carried away.

BUY A HALF POSITION

Explorer Weekly Stock Commentary

Below is a brief update on each Explorer stock. Any changes in ratings will be highlighted. This section is all you need to read each week.

Explorer Disrupter Recommendations – need to watch more closely and have a 20% trailing stop-loss in place.

Agnico Eagle Mines (AEM) shares were steady this week and up about 15% so far in 2025. It has mines in Canada, Australia, Finland, and Mexico, with exploration and development activities focused on Canada, Australia, Europe, Latin America, and the U.S. The company will report its next earnings on February 13. Buy a Half

Airbus (EADSF) shares were up slightly this past week as its CEO confirmed that it will reach its target of manufacturing 75 single-aisle aircraft a month in 2027. Airbus delivered 766 jets in 2024, but one concern is the stock is a bit pricey with a price-to-book ratio of 6.55. Buy a Half

American Superconductor (AMSC) shares gave back almost all of the previous week’s gains as the stock was impacted by the DeepSeek breakthrough. The company’s product portfolio, including advanced grid interconnection systems, high-temperature superconductor cables and wind turbine designs, aligns closely with the global shift toward clean energy and resilient power grids. Its strategically important growth markets such as maritime, Maglev technology, and AI data centers are all huge growth opportunities. Buy a Half

Banco Santander (SAN) shares were up 6% this week and are up about 14% in the new year. Headquartered in Spain, it is in the retail, corporate, investment, and other banking markets. Its shares are up by 28% over the past twelve months as a quality diversified global bank with exposure in Europe and emerging markets. It currently has a forward P/E ratio of only 6 and is trading at about 60% of book value. Buy a Half

BYD (BYDDY) shares stayed at 70 this week as the company announced it sold more EVs in Japan last year than Toyota. Remarkable given that BYD only launched its first EV in Japan in early 2023, quickly gaining due to a price tag starting around $30,000 for its Atto 3 vehicle. BYD also plans to complete its $1 billion plant in Indonesia by the end of 2025. Buy a Half

Centrus Energy (LEU) shares were down 10.4% this week as nuclear power companies got knocked backward by the DeepSeek news. But Centrus is increasingly seen as a proxy for the growth of AI data centers which will likely rely on SMR nuclear facilities to generate their massive electricity needs. According to research from Goldman Sachs, data center energy consumption is expected to surge by 160% by 2030. Buy a Half

Cloudflare (NET) shares were up 10.7% this week following last week’s 9.5% gain. The stock is up 60% in the last six months fueled by the adoption of its AI product features. It will report its financial results for the fourth quarter after the U.S. market closes on February 6th. Hold a Half

Dutch Bros (BROS) shares were up slightly this week and are up about 15% so far this year as the company announced it will report quarterly earnings on February 12. The key going forward is staying disciplined in opening new locations and not being too aggressive. Hold a Half

Sea Limited (SE) shares were up 3% this week and have surged 208% over the last year powered by three engines: e-commerce Shopee platform, digital financial services (SeaMoney), and the digital entertainment wing (Garena). The stock is getting expensive, however, trading at more than eight times book value. Hold a Half

Explorer Dominator Blue-Chip Recommendations – More Buy and Hold

Alphabet (GOOG) shares held steady this week, but I’m concerned that this is just the sort of platform company that will face increased competition and will see margins decrease. This, plus the continued cloud of antitrust litigation, prompted me to move the stock from Buy a Half to Sell.

International Business Machines (IBM) shares were up in a tough week for tech and announced an unbroken quarterly dividend streak of over a century. The company offers all the tools clients need to train and manage AI models that can be run on multiple public clouds. The company has also built the world’s largest quantum computing network through its “Quantum Platform.” Buy a Half

Visa (V) shares were up another 4% this week. The stock is regaining some ground so far this year as the U.S. government seeks to make the case that Visa is a near monopoly on the debit card side of the business. Buy a Half

Watch List – Stocks we like but do not follow day-to-day

ConocoPhillips (COP), Franco-Nevada (FNV), MOOG (MOG-A)

Explorer ETF/Fund Positions

Aberdeen Asia-Pacific Income Fund (FAX) is a closed-end fixed-income mutual fund launched and managed by Aberdeen Standard Investments (Asia) Limited in Singapore. Buy a Half

Grayscale Bitcoin Trust (GBTC) offers investors a way to track very closely to the day-to-day or “spot” movement of bitcoin prices. For aggressive investors comfortable with volatility. Buy a Small Allocation

JPMorgan Equity Premium Income ETF (JEPI) offers double-digit yield coming from both option premiums and dividends using a value-focused strategy. Buy a Full

Morgan Stanley China A Share Fund (CAF) offers exposure to a basket of top Chinese-listed stocks. Buy a Half

Oberweis Micro-Cap Fund (OBMCX) fund stands out for several reasons. The fund’s sound investment process and strong management team earn it a rare Morningstar Medalist Rating of Gold. Over the past five years, it has posted an impressive average annual return of 21.1%. Buy a Half

Sprott Platinum and Palladium ETF (SPPP) offers direct exposure to both platinum and palladium which are selling at a sizable discount to gold, offering potential upside appreciation. Buy a Half

WisdomTree Emerging Markets High Dividend Fund (DEM) offers a high dividend yield and some of the highest-quality emerging market stocks. Buy a Half

Model Portfolio

ETFs

Explorer Stocks Summary

Brief company summaries that will not change week to week.

Agnico Eagle Mines (AEM) follows a conservative strategy and with a history spanning more than 60 years, and now operates a sizable portfolio of 11 assets located in four countries. Management forecasted gold production of approximately 3.45 million ounces in 2024. The company estimates it has about 54 million gold ounces of proven and probable reserves. Furthermore, Agnico Eagle has paid a dividend for 41 consecutive years with a dividend compounded growth rate of 23% per year since 2005 and paid a dividend of $1.60 per share in 2024.

Airbus (EADSF), along with Boeing, is one of only two manufacturers, that make the full-size commercial jets needed by the world’s airline industry. China’s COMAC is making gains but probably a decade away from being a competitive rival. Boeing’s troubles are Airbus’s opportunity. Airbus, incorporated in the Netherlands but based in Toulouse, France, is making planes as fast as it can and has a backlog of more than 8,600 orders to fill. Airbus last year beat Boeing for the fifth straight year in the orders and deliveries race, with 2,094 net orders and 735 delivered planes. I visited its facilities recently and while it shares some of Boeing’s supply chain challenges, Airbus has a clear edge right now. Airbus is benefiting from its decision to deliver the fuel efficient to launch A321neo, a single-aisle aircraft with 180 to 230 seats. Fuel is one of the airlines’ biggest costs. Airbus’s new A321XLR model will also enable airlines to use cheaper narrow-body jets on long-haul flights.

Alphabet (GOOG) is becoming a play in artificial intelligence (AI) play. To dominate in AI, it takes two things: lots of data and lots of computing power (and the energy to run it). Perhaps the biggest challenge for companies hoping to capitalize on that idea has been a lack of data – the kind that Google is sitting on through decades of running the internet’s dominant search engine. But the parent of Google, Alphabet, is much more than this as evidenced by the just-announced breakthrough in quantum computing with Willow, a chip that’s faster than the world’s most powerful supercomputer. This highlights the firepower of the company and long-run potential to dominate new emerging technologies. Alphabet also owns the world’s most-visited video platform (YouTube), the world’s third-largest cloud (Google Cloud), and a host of interests in other technologies, like autonomous driving, quantum computing, and smartphone software.

American Superconductor (AMSC) aims to modernize the electrical grid by helping it connect and distribute power. Its products allow and coordinate the power grid including transmission lines, substations and generators. For example, its mega-watt scale power control gear leads to safer and more resilient and efficient power grids. The company is already the leading supplier of high-performance superconductor cables and its top markets are strategically important growth markets such as: Maritime, Maglev technology, and AI data centers – a huge growth opportunity.

Banco Santander (SAN) was founded in Spain in 1857. The bank’s U.S. headquarters is in Boston, but its strength lies in Latin America and Europe where it has more than 8,000 branches with 171 million customers as well as 58 million digital accounts. About 55% of deposits and loans are in Europe with the balance in Latin America. In its most recent quarter, Santander’s revenue was up 8% while net profits increased 16%.

BYD (BYDDY), in both 2021 and 2022, more than tripled sales from the previous year. That’s hyper growth and including hybrids, BYD has already surged past Tesla in terms of sales. Most of BYD’s sales are still in China but it has a big international expansion underway, including in the U.S., Europe, and Asian markets. BYD is the world’s largest EV battery maker and with CATL and others, is working on sodium-ion batteries. Much less energy dense than lithium batteries, sodium batteries should be much cheaper. BYD will also launch a next-generation Blade battery in 2025, with longer range and faster charging. That, along with various other models, could help rev up BEV sales growth next year. BYD expects solid-state batteries for high-end models by 2027, but not fully reaching lower-end models until 2030-2032.

Centrus Energy (LEU), based in Bethesda, Maryland, supplies nuclear fuel and services for the nuclear power industry in the United States, Japan, and Europe. Centrus Energy is building an enrichment facility in Ohio and would be very likely to benefit especially if federal funding moves forward to support this and other nuclear projects. I believe Centrus stock will benefit from increasing demand for its services, and that downside risk is low while upside potential is significant.

Cloudflare (NET) is both an aggressive and dominator recommendation offering products and services in four cutting-edge fields, though cloud computing is its bread and butter. Its global reach is breathtaking as 20% of all web traffic runs through Cloudflare’s network and over 95% of internet users from 180 countries worldwide access the company’s services each day. And it reaches these users within 50 milliseconds. The firm’s client list includes more than 30% of Fortune 1000 companies and the ability to efficiently move and connect data – from where it is located to where it is needed (edge computing) – is a massive business opportunity in which Cloudflare already excels.

Watch List: ConocoPhillips (COP) is a global energy industry giant and one of the largest independent exploration and production (E&P) companies in the world, as measured by production levels and proved reserves. The company, founded in 1917 and based in Houston, has operations in 13 countries, although almost half the company’s production is derived from U.S. sources.

Dutch Bros (BROS) is an operator and franchisor of drive-through coffee stores, with 950 stores as of the end of the third quarter, including 38 that it opened in the quarter. It’s expanding at a steady pace, expecting up to 165 new stores in 2024, and it envisions up to 4,000 stores over the next 10 to 15 years.

Watch List: Franco-Nevada (FNV) is a company with more than half of its revenue coming from gold, but it also offers exposure to platinum, silver, and oil and gas. Franco-Nevada’s focus on royalties and streaming reduces risk and enables it to sidestep the huge capital costs that impact traditional miners. It enjoys cash flow and profits as its mining partners finance and complete exploration and expansion projects. That cash flow enables it to invest in new deals, pay a dividend, and operate debt free. Franco-Nevada has increased its dividend each year since its IPO in 2008.

International Business Machines (IBM) is a blue-chip artificial intelligence (AI) and India play with a nice dividend yield. Known as “Big Blue,” IBM now primarily helps businesses and governments manage their information technology in the cloud era. The stock sells at a discount to the S&P 500 multiple and the information technology sector’s forward earnings multiple. IBM has paid a dividend every quarter since 1916 and has had 29 consecutive years of dividend increases.

Watch List: MOOG (MOG-A) supplies advanced primary flight controls on the most modern military aircraft. That includes the Lockheed Martin F-35 Lightning II and the Future Long Range Assault Aircraft program. The company’s major platforms include the 787, A350, Joint Strike Fighter (F-35 Lightning II). The company also supplies primary flight controls for the Boeing 787 and Airbus A350 widebody aircraft, as well as business and regional jets from Embraer (ERJ) and Gulfstream, owned by General Dynamics (GD).

Sea Limited (SE) has three core businesses: 1) digital gaming/entertainment, 2) e-commerce, and 3) digital payments and financial services, known as Garena, Shopee, and SeaMoney, respectively. Garena is a leading global online games developer and publisher. Shopee is the largest e-commerce platform in Southeast Asia and Taiwan. SeaMoney is a leading digital payments and financial services provider in Southeast Asia.

Visa (V) doesn’t extend credit but provides the plumbing for financial payments and communications throughout the world. Visa’s financial infrastructure also underpins much of the world’s commerce. The duopoly between Visa and Mastercard is often referred to as one of the best businesses in the world, with insurmountable moats, low operating costs, and plenty of opportunities for unlocking additional value. Visa currently trades at a discount to its archrival MasterCard.

The next Cabot Explorer issue will be published on February 13, 2025.

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